Background and Assumptions of Our Energy Financing Animation
Our new Energy Financing Animation shows that an efficiency project’s payback period is important not only for a company’s return on investment, but for the magnitude of secondary benefits they receive. The Q & A below describes the various perceptions of job creation and wider economic benefits that come from energy efficiency. It also explains the assumptions behind the financing and job creation calculations that the animation presents.
What inspired this project?
We really wanted to tackle this issue of how you should think about jobs and wider economic benefits from efficiency. There is a sense out there that the more an efficiency project costs, the more economic stimulus it provides. But thats a narrow perspective and it neglects the longer term benefits to the customer. What we see with customers is that the important economic benefit comes from the businesses that are saving money through efficiency, who then are able to do more with that money. We’ve calculated for our lighting program that the jobs benefit in the business versus the “green” construction jobs up front is about 3 to 1. The focus shouldn’t be on the cost, but on the payback. Obviously, when an efficiency project has a shorter payback, the business can save that money sooner.
Why make this distinction between low hanging fruit and deep retrofits?
These are the popular terms people might hear, and they are good shorthand. But the important distinction is really between long- and short-payback periods. Deep retrofits often can have short paybacks, so thats important to keep in mind.
Obviously, for people interested in efficiency, you ultimately want more than the low hanging fruit. A “deep” retrofit is great because you are going in and doing more in the building. You’re saving more energy. But the question is, when should you try to save that energy - in one package up front, or over time? This is where you see a lot of disagreement.
What is the main source of disagreement?
Mostly over how customers actually behave. On the one hand, people think that by just focusing on the least expensive stuff, you are leaving too much on the table. You need to package the truly low cost stuff with the more expensive stuff to make a more salable package that will save more energy. On the other hand, people really do get scared off when they are asked to do too much. It’s either too expensive, or they have to make choices, and they walk away. If you start them with a small project thats successful, they are more likely to want to do more. The idea that you have to get it all done at once or you lose your chance just isn’t true. It might be true if someone’s buying a new car, but not when they are receiving a service.
Deep retrofits are also best for certain windows of opportunity - like when a building changes ownership or undergoes a remodel, or when its time for a major mechanical overhaul. A great example is the recent Empire State Building retrofit, where the incremental costs for energy efficiency were low. But its hard to mass produce a deep retrofit program, because you have very different and complex situations across buildings. There is a danger that customers get sold on things they may not need. Its more important to make sure those windows of opportunity aren’t being missed.
What are the policy implications?
Well, obviously there’s the piece about how you should approach energy efficiency as an economic stimulus. We know efficiency is great for the economy because its cheaper and more job-intensive than the dominant forms of energy, and most of those jobs are local. But you do want to think about where the money goes. If you finance a lot of expensive projects, then its not saving the customer a lot of money - its tied up in their new equipment.
Policy is also tied to that question, “What if you had $60,000 to spend... would you do one large project or ten small ones?” That’s the comparison we don’t make enough. We don’t think across the whole building stock. Instead we compare one small project to one large project, so of course the large one looks better on certain counts. But really, in policy you often have some fixed amount of money you want to spend, and you’d like to get the biggest benefit.
What assumptions are you making for the story you present here?
The financing calculations are very straightforward. If you assume that someone will use their savings for their loan payment, the project’s simple payback tells you the annual savings as a function of the total loan amount. Then you can calculate how long your loan term would have to be for different interest rates, to keep up with those steady payments. It’s pretty interesting when you map it all out, to see the impact of those high interest rates on long payback projects.
Calculating how many jobs get created is a complicated question. People devote their PhDs to this. The complete picture considers upstream, secondary jobs - but that requires input-output analysis and all kinds of assumptions. Here we took a really simplified case of the direct jobs from these two projects, but it illustrates the point.
For simplicity, we let $6,000 employ one person for one month. We assumed half of all the money--both the project cost and the savings--goes to jobs. The rest goes to materials or other spending in the business. For our $60,000 projects that means five construction job-months. Short payback projects combined save $20,000 a year starting in Year 4 - so they can hire three people for a month. The deep retrofit job has to wait until Year 11 to hire one person for a month.
Is that your voice?
Haha - yes, thats my voice. This is the first time we narrated one of our IX animations, and it allowed us to tackle more complex ideas. But the problem is, then you have to write and record a script! That’s hard. Its very different than print writing. I had some previous experience co-producing a public radio documentary, so I at least had an idea of the work required to make a good audio script. You can’t tweak it after the fact, because the animator needs the final product to get all their images and timing right. That’s hard for a perfectionist like me.